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Optimal Nonlinear Taxation of Income and Education Expenditures

  • Jang-Ting Guo

    ()

    (Department of Economics, University of California Riverside)

  • Alan Krause

    ()

    (Department of Economics and Related Studies, University of York)

Despite using a variety of models and assumptions, the existing literature has overwhelmingly concluded that education policy should be regressive. In this paper, we examine a two-period model in which the government may impose non- linear taxes on both labour income and education expenditures. Individuals un- dertake education in the Örst period to increase their second-period wages. Our main result is that optimal education policy in our model is progressive. SpeciÖ- cally, if the government can commit, it is optimal for high-skill individuals to face a zero marginal tax rate on their education expenditures, while that for low-skill individuals is negative. If the government cannot commit, the optimal marginal tax rate on education expenditures by high-skill individuals is positive, while that for low-skill individuals remains negative.

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File URL: http://economics.ucr.edu/repec/ucr/wpaper/10-08.pdf
File Function: First version, 2010
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Paper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 201008.

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Date of creation: Aug 2010
Date of revision: Aug 2010
Handle: RePEc:ucr:wpaper:201008
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  1. De Fraja, Gianni, 1998. "The Design of Optimal Education Policies," CEPR Discussion Papers 1792, C.E.P.R. Discussion Papers.
  2. Jang-Ting Guo & Alan Krause, 2008. "Optimal Nonlinear Income Taxation with Habit Formation," Working Papers 200810, University of California at Riverside, Department of Economics, revised Aug 2008.
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